Alphabet shareholders will welcome Government revisions to Entrepreneur’s Relief rules, say tax experts

Manchester commercial law firm Kuits has welcomed the Government’s revisions to its proposed changes to Entrepreneur’s Relief (ER) Rules.

Last month, tax experts at the firm commented that the proposed amendments would severely prejudice shareholders with alphabet shares in companies from getting ER.

What were the old rules for Entrepreneur’s Relief?

ER provides individuals selling shares in a trading company the opportunity to reduce their Capital Gains Tax charge from 20% to 10%. The conditions prior to the autumn budget on 29 October 2018 were as follows:

• The shareholder must have been an employee or officer of the company for at least 12 months
• They must have held shares in the company for at least 12 months which give them 5% of the company (usually by nominal capital) and at least 5% of the voting rights

What changed in the Autumn Budget?

The Autumn Budget brought significant changes to the original rules and were the root of some confusion amongst alphabet and growth shareholders. The additional requirements, which came in from midnight on the 29 October, were:

1. The shareholder must have a right to at least 5% of the profits of the company
2. The shareholder must have the right to at least 5% of the company on liquidation
3. The ownership period required increased from one year to two years

What was subsequently amended and do I still qualify for Entrepreneur’s Relief?

Following the revisions to the proposals, if points 1 and 2 above are not satisfied there is an alternative test: that the shareholder must be entitled to at least 5% of the proceeds of sale if the company were to be sold.

Kuits’ view is that the changes should ensure that holders of alphabet shares who match the other qualifying conditions and would be set to receive 5% or more of the sale proceeds on a sale should now continue to qualify for ER.

However, holders of shares in companies that have issued growth or flowering shares may still not qualify if the growth shares could reduce the share of any sale proceed for a shareholder below 5%.

Paul Bricknell, tax partner at Kuits, commented: “We very much welcome the revision to the new rules. The use of alphabet shares is commonplace and to deny holders Entrepreneur’s Relief seemed penal and unnecessary.

“In particular, the revisions will provide comfort to the majority of people who have sold their businesses since 29 October last year that they now should get ER – ending a period of significant uncertainty.”

Seeking advice on Entrepreneur’s Relief

Kuits would encourage any company that has alphabet or growth shares within their structure to take proper advice to review the company articles and any shareholders agreement to ensure they will qualify for ER on any future sale. This seems particularly true for any company with growth shares where future growth could dilute the value of some shareholders’ shares to below 5% of the overall company.

For advice on Entrepreneur’s Relief, please contact Paul Bricknell on 0161 838 7860 or email paulbricknell@kuits.com.